Bond traders have taken yields at very short end of the curve and mid-range (2 to 10 year maturities) a bit higher as confidence in the economy has temporarily strengthened.  However as I’ve mentioned in prior articles, we may already be in the very early stages of a slowdown (or recession) and the partially inverted curve (5 year rates lower than very short term rates) to me would suggest likewise.

The Producer Price Index for final demand advanced 0.5 percent in January, as prices for final demand services rose 0.7 percent and the index for final demand goods inched up 0.1 percent. The final demand index increased 2.1 percent for the 12 months ended in January.

Source: Bureau of Labor Statistics (February 19th, 2020)

The rising short end may be in response to news on the inflation front. Despite this blip, it is unlikely the FED will do any hiking of rates in an election year, and have indicated they are quite happy with the state of the US economy (holding fast).  Nasdaq continues to hit all-time highs, which I interpret as desperate money trying to chase the one thing that’s working (tech) – a self-fulfilling fantasy that will end with an ugly bursting of the bubble.  There’s more safety in sectors that are downtrodden already and may see some life once demand revives post-coronavirus. This is why I prefer resource stocks such as fertilizers or metals or even cannabis stocks that haven’t seen the light of day for many months or even years.

As for bonds, the safest place to be is at the short end – rolling over at increasingly higher rates as inflation pressure builds. Also a good place to park is the very long end since rates may fall even further as the yield curve inverts.

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